By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — European banks grabbed a larger-than-expected 529.5 billion euros ($713.4 billion) in cheap loans Wednesday, in the European Central Bank’s second and possibly last long-term refinancing operation.
The ECB said a total of 800 banks were allotted funds under the latest three-year LTRO. The operation has loomed large on the calendar ever since the ECB’s first such operation in December saw more than 500 banks take up an unexpectedly large €489 billion in three-year loans.
Expectations for the uptake at Wednesday’s operation varied. Some economists had initially penciled in uptake of nearly €1 trillion, but most scaled back expectations, with the consensus settling around €500 billion or slightly less.
‘Goldilocks outcome’
Ahead of the announcement, strategists had warned that a much larger- or much smaller-than-expected outcome could dent risk appetite. A large uptake would stir worries about bank balance sheets, while a smaller-than-expected uptake would deny the liquidity needed to provide further fuel for risk appetite.
Martin van Vliet, senior euro-zone economist at ING Bank in Amsterdam, said the alottment was just right from a market perspective.
“In our view it is a Goldilocks outcome: not overly large as to generate concern about the fragility of the European banking system, but high enough to pre-fund a substantial share of maturing bank debt and spark more buying of Italian and Spanish paper.”
The results provided a boost for risk-oriented currencies such as the Australian dollar and the New Zealand dollar, strategists noted. However, the euro, which had previously rallied to a three-month high versus the dollar below $1.35 in anticipation of the LTRO, fell prey to profit-taking as traders sold the fact, strategists said. Read Currencies.
The euro EURUSD -0.06% traded at $1.3439 versus the dollar in recent action, down from $1.3473 in North American activity late Tuesday and down from around $1.3465 ahead of the LTRO announcement.
The yield on 10-year Italian government bonds IT:10YR_ITA -2.15% was seen at 5.26%, falling from around 5.32% ahead of the LTRO announcement and down 1 basis points from Tuesday.
After choppy price action, European equities were holding modest gains.
After accounting for funds rolled over from other ECB refinancing operations, banks grabbed a net €310.6 billion in additional funding in Wednesday’s LTRO, estimated Norbert Aul, fixed-income strategist at RBC Capital Markets.
Opening channels, easing fears
The ECB introduced the three-year LTROs in December as it sought to quell fears of a potential near-term funding crisis for euro-zone banks. The injection of liquidity was credited with reopening some funding channels, though some still remain largely closed.
